For individuals leaping to earn new cryptocurrencies by providing security to large blockchains which use proof-of-stake, there may be good news ahead. IRS will not tax your unstaked crypto.

A Nashville couple argued in May that tokens obtained through proof-of-stake protocols are taxpayer-created property that should not be taxed until they are sold or exmovementd. The choice to refund may help to clarify the POS tax in the future.

Decision Is A Win For POS protocols

According to a civil lawsuit filed on May 26, 2021 with the US District Court for the Middle District of Tennessee, Joshua and Jessica Jerrett asked for a refund of $3,293 in income tax paid in 2019 for the receipt of 8,876 Tezos tokens. In addition, the pair requested a $500 increase in tax credits to compensate for lost income.

According to sources with familiar with the case, Joshua and Jessica Jarrett received a letter from the Department of Justice on Dec. 20 stating that the Internal Revenue Service (IRS) had confirmed a full refund of their 2019 taxes alsost the tokens they earned through staking in the Tezos network, plus statutory interest.

The decision is a important step forward in the fledgling staking industry’s fight to have staking rewards classed as property rather than taxable income. According to Staked, a leading provider of staking services that was acquired by the crypto exshift Kraken in December 2021, the business has grown to an estimated $18 billion in size.

The Jerretts contconcluded that tokens obtained through proof-of-stake protocols are taxpayer-created property that should not be taxed until they are sold or exevolutiond. According to the complaint, there is no provision in US law or IRS rules and regulations that authorizes taxpayer-created property to be taxed as income.

Regardless of the initial success, the Jarretts’ counsel rejected the IRS’s offer of a tax refund on Jan. 25, claiming that the agency had given no assurance that they would not be taxed likewise.

In other words, the Jarretts won the first round of their lawsuit (Jarrett et al v. United States of America), that was filed in May 2021 in Tennessee Middle District Court, but that victory would only apply to their 2019 taxes. They intend to pursue the matter in court in order to obtain prolonged-term protection. This perhaps create a precedent for anyone wanting to profit from token staking.

The ruling could have far-touching repercussions for the future taxation of proof-of-stake miners and stakers.

Related Reading | How US Traders Are Dominating The Bitcoin Market

Should The IRS Tax Crypto Income?

In Notice 2014-21, the IRS said,

“A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market price of the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received.”

Supporters of the Jarretts say that crypto acquired through staking is not the same as token earned through exchanging or selling, and thin place should not be taxed until it is sold or traded.

For a variety of reasons, token is staked, that is, locked up under certain conditions, recurrently to earn some form of emission of more tokens. The most common one is to serve as a bonas fideator in the proof-of-stake (PoS) network. Validators in analogous networks put their tokens on the line as skin in the game. Capital and operational expenses (machines and electricity) play a part in a proof-of-work network. Both are safeguards furtherst spamming and malicious activity by the distributed group of people that legitate network transactions.

IRS crypto

Bitcoin (BTC)/USD trades at $36k. Source: TradingView

Mattia Landoni of the Federal Reserve Bank of Boston and Sutherland of the University of Virginia School of Law wrote in an August 2020 article in Tax Notes that the way PoS networks gradually dilute their tokens puts taxpayers at a disadvantage if they are taxed at the time the tokens are created.

Buying and selling token in the US is taxable because the Internal Revenue Service (IRS) considers token to be property rather than currency. It levied a tax ranging from 0% to 37%. In a country like Netherlands, Cryptocurrency is subject to a 31% tax in the country. Only the portion of the gain captured on the sale of cryptocurrencys for more than $58,232 (51,645 euros) is owed to the tax authorities in Italy, that is equal to the old one hundred million lire.

Related article | Why The IRS Sees “Mountains Of Fraud” In Crypto And NFTs

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